New research by Incapital shows that structured notes, particularly nonprincipal protected notes, will likely surpass structured certificates of deposit in terms of growth in 2013.

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New research by Incapital shows that structured notes, particularly nonprincipal protected notes, will likely surpass structured certificates of deposit in terms of growth in 2013.

Incapital, a leading underwriter and distributor of fixed income and other financial products, polled nearly 100 financial professionals at its 2012 Structured Investments Conference in October, which assessed the overall sentiment of advisors about structured products and their perceived key attributes and challenges.

Advisors polled said the primary reason they are using structured products is to add equity exposure to clients’ portfolio (34%), while 26% felt that structured products were best used to replace plain vanilla income products such as CDs, and 20% use them for portfolio diversification.

“We’ve noticed a shift in investors’ appetite that is likely to continue into 2013, as more and more financial professionals are gravitating toward non- or partially-protected notes,” said Glenn Lotenberg, managing director at Incapital, in a statement. “Our survey found that in this low rate environment, advisors are incorporating them into investors’ portfolios as a more efficient way to enhance yield and as a means to build equity exposure.”

Additionally, the survey found that the greatest attribute of structured products is enhanced yield, with 42% of respondents finding them most valuable for that purpose. Principal protection, access to asset classes otherwise not available and the ability to customize structures followed as additional reasons, ranging as the key attribute for 15% to 17% of respondents.

The survey also revealed that an overwhelming majority–60% of respondents–view education as the key component in making structured products more popular. Education far outweighed any of the other factors such as greater liquidity, simpler structures and lower fees as driving elements in building a stronger presence for structured products in investors’ portfolios.

“Education is clearly fundamental to the wider understanding and adoption of structured products in the investment community,” said Deryk Rhodes, vice president in Incapital’s Structured Products Group, in the same statement. “There are a large number of investors for whom structured notes could be an appropriate investment vehicle. Many financial advisors and their clients, however, lack a clear understanding of what these notes have to offer, how they work, the relevant risks and the impact they have on a portfolio.”

Jim Schaberg, managing director of marketing for Incapital, notes that it’s important for advisors to brush up on structured notes, as “allocation to structured notes in a diversified portfolio should be undertaken with full awareness of the various risk factors, including issuer credit risk and secondary market liquidity.” A valuable resource, he adds is Incapital’s web site structuredinvestments.com, which provides advisors industry-leading content and risk disclosure, including regulatory guidance.

Although structured investments are often considered “niche products,” Schaberg says, “advisors who are well educated in the features and customized strategies of a broad range of structured notes represent a growing percentage of wealth managers.”

Melanie Waddell

Melanie is Washington Bureau Chief, Investment Advisory Group. She also covers regulatory and compliance issues and writes The Playing Field column and Human Capital briefing. Reach her at mwaddell@alm.com. On twitter: @Think_MelanieW

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